Lesson one: A methodology and strategy tailored to you

Section 1: Understanding different types of analysis

Analysis and tools to find trading opportunities

There is no one right or wrong way to analyse and trade the markets. There are countless ways to take advantage of market fluctuations, and when you compare the methodologies of successful traders to one another, no two are the same.

There are certain 'dos' and 'don'ts', however, which have become universally accepted rules. For example, buying a market into resistance or shorting it into support is agreed upon by market veterans as a low probability approach. But in general, there are many ways to find an edge, or advantage, and then trade it.

Having an edge which resonates with you and consistently applying it is the most important concept to understand here. If you can't 'own' the analysis you are using, it will be difficult to have the confidence needed to act on it.

Analysis generally falls under one of two categories – fundamental and technical. Some traders may solely utilise one form, while others use a blended approach. Shorter-term to intermediate-term traders (intra-day to several weeks) typically put more weight into technical analysis, while longer-term traders or investors may lean more towards fundamentals with lighter emphasis on the technical aspects of the market.

Since the majority of short to intermediate-term traders place heavy emphasis on technical analysis we'll focus on that area of expertise. There are many forms of technical analysis and tools one can use, which include simple price-based support and resistance, trend-lines/slope analysis, candlestick formations, chart patterns (i.e. triangles, head-and-shoulders, flags, etc.), moving averages, Fibonacci retracement levels, Ichimoku Clouds, sentiment metrics, Elliot-Wave Principle (EWP), Gann analysis, and more. All these are viable tools or ways of looking at the market, but not all of them will be for you.

When constructing your analytical methodology, keep it as simple as possible. Using just a simple trend-line tool is not likely enough to find good trading opportunities, but using ten different forms of analysis will be too much. The more forms of analysis involved, the more complicated it gets, and the more complicated it gets the more likely you are to suffer from paralysis by analysis; that is, you will find it difficult to make decisions due to information overload.

A good rule of thumb is that every additional facet to an analysis approach should offer a whole unique view of the market. If it is merely derivative of something already evaluated, its value is marginal and may give a false sense of diversification.

Bottom line: You won't be able to act with confidence when you become overwhelmed by too much information.

Have a strategy to take advantage of the conclusions drawn from your analysis

The strategies employed varies from trader to trader, and while one strategy may work for one person it won't work well for another. Two traders could draw the same conclusion but have different ways in which they use the information.

For example, some traders are more comfortable trading breakouts, while others are more at home when buying dips or shorting rallies within a trend. Other traders prefer to trade range-bound markets by fading key levels of support and resistance. So, you must ask yourself what kind of trades do you trade best?

There are lots of ways to make money in the markets, what is most important is that whatever methods you choose are ones which give you the confidence needed to make good decisions.

Make sure every trade is backed up by a good plan

What is your reasoning for entering into the trade, and does it fit your parameters?

Where will you exit if wrong (stop-loss) and where will you exit when right (target price)?

The distance from your entry to your target should be sufficiently larger than the distance to your planned stop. A risk/reward ratio of approximately 1:2 or better is a good rule of thumb to operate from.

Successful trading requires consistency. This can be especially challenging for the newer trader, as you are still figuring out what works. It's important to be consistent though in sticking with your analysis and strategies and not jump around from one approach to another at the first sign of trouble.

You can't possibly build confidence if you are constantly changing your process. If you find that you need to tweak an existing strategy or change to a different strategy because of poor performance after a predetermined amount of time has passed, do that. For example, make a commitment to stick to your trading plan for at least six months before changing anything. Trading that way will give you enough data from which to draw conclusions once you've changed your strategy.

In addition to patience when trading a new strategy, it is important to trade it with reduced size until fully confident. Losing as little as possible during the 'test' phase will help keep your objectivity, and most importantly, keep you in the game by not losing too much trading capital. Capital preservation should always be on your mind. It certainly has an impact on confidence.

Section 2: Timing is everything

Selecting the right timeframe to suit your lifestyle

The “right” timeframe to trade is highly dependent on the individual, but there are loose guidelines worth considering.

Popular timeframes such as the 4-hr (hour) and daily timeframe offer traders ample opportunity without all the noise that comes with shorter-term, day-trading timeframes such as the 5 and 15-minute charts.

There is nothing wrong with day-trading, but keep in mind it is far more mentally taxing and time consuming. Most traders also have a day job which puts a restraint on how much time can be spent in front of the screen.

The 4-hr and daily timeframe is very effective in this regard, and even professional traders tend to gravitate towards these slower timeframes. These are not only good on time, but also ‘slow down’ the market action, which allows you to better process information. Any time you can slow down the process you will naturally feel more confident about what you are doing.

It’s also a good idea to stick with a limited number of timeframes, as it keeps your analysis simplified. Looking at multiple timeframes for opportunities is a highly effective way to identify larger themes which you can trade on short-term time-frames, but it’s still a good idea to keep it limited. For example, you might identify a trend developing on the daily chart, but don’t want to hold a position for days to weeks. In this case, you could dial in on the 4-hr chart to find short-term trading opportunities.

Section 3: Find the right market

Focusing on finding the best opportunities in a narrowed universe of markets will give you more confidence when it comes time to act. Not every market moves the same, so knowing the nuances of how a market trades will help you act more decisively. By reducing the number of markets in focus you will also help reduce the number of positions you hold at once; too many positions can be a daunting task to handle mentally, even for the experienced trader.